advancing the debate of socialist vs capitalist, instead of declaring victory
proof by intimidation
getting the buyer to tell the truth (e.g. of auction)
Nobel-winning economist who put a premium on truth
By Tim Harford
Published: July 19 2008 03:00 | Last updated: July 19 2008 03:00
Leonid Hurwicz, the economist who last year became the oldest person ever to win a Nobel prize, helped transform economic thinking in the second half of the 20th century.
For years economists had been passionately debating the rival merits of state planning versus free markets. In both systems, people had incentives to lie to bureaucratic planners or to employers about their interests, their skills or their circumstances. "Leo", who has died at the age of 90, founded the field of "mechanism design", a new way of thinking which focused on giving people incentives to tell the truth and to do so in a way that would benefit society as a whole.
His mechanism design idea has applications in a range of practical areas, from the design of computer networks and voting systems to arbitration rules.
The debate between state planning and free markets must have seemed far from academic to Hurwicz. His parents were Polish Jews who fled the Kaiser's invading army, going to Moscow, where Hurwicz was born in 1917. They returned to Poland in a horse-drawn wagon to escape the Bolsheviks when he was two. He went to the University of Warsaw and took a degree in law, though he also studied piano at the conservatory. Throughout his life Hurwicz was a renaissance man whose interests included music, linguistics, maths, physics and meteorology. Yet as a student his interest was kindled in economics. He went to London to study and then, via Geneva, to the US, where he arrived in 1940. His parents and his brother joined him but only after fleeing another invading German army - this time the Nazis - and then spending time in Soviet labour camps.
On his travels, Hurwicz had studied under both Ludwig von Mises and Friedrich Hayek, who was at the London School of Economics as Hurwicz began his PhD studies there in 1938. Von Mises and Hayek argued that a centrally planned economy was doomed to collapse: because every individual knew his own needs and capabilities best, government planners could never hope to piece it all together and make sensible decisions. Other economists, such as Oskar Lange, disagreed.
A burgeoning economic theory of competitive markets, and bitter experience of the failings of socialist economies, led many to conclude that von Mises and Hayek were right.
Hurwicz was more interested in advancing the debate than declaring victory. "Panaceas are not to be found at either end of the spectrum," he wrote in 1984. He agreed with Hayek and von Mises that a bureaucrat who simply demanded results would be met with slacking, budgetpadding and lies. But rather than giving up, Hurwicz attacked the problem directly. He asked what "mechanisms" an intelligent but ill-informed planner might use to extract information from others and then allocate resources fairly, efficiently or profitably.
Such mechanisms are as old as trade itself, most obviously the auction, in which even an ignorant seller can expect a good price. But Hurwicz laid the foundations for thinking systematically about designing mechanisms, defining all the terms rigorously and showing what might be possible.
Hurwicz described a mechanism as a kind of "message centre", where market participants would submit information, true or false, and a pre-specified set of rules would adjudicate the result.
That abstract description is a perfect account of an Ebay auction: a seller sets a minimum bid, a time limit and perhaps a reserve price, while bidders submit bids that may bear no resemblance to the true value they place on the prize. EBay is just one example of a message centre; Hurwicz showed that it was useful to think about many economic institutions in this way.
Participants in a mechanism can always lie. A keen buyer can pretend to be an indifferent one; a brilliant worker can conceal his laziness. Hurwicz realised that in order to get a better bid from the keenest buyer, for example, the seller must give that buyer a reason to tell the truth.
Similarly, an employer cannot persuade the ablest worker to work just as hard as the rest unless the extra effort brings extra rewards. The general problem of persuading the "best" agents to act differently from the rest is called the "incentive compatibility constraint".
One example would be an auction where the highest bidder wins but only has to pay the second highest bid. This strange-sounding rule is all it takes to persuade the keenest bidder to tell the truth about the real value he places on the prize. EBay uses a similar rule.
Although Hurwicz studied with the greats of the field - including Nicholas Kaldor at the LSE, and Paul Samuelson - he never had an economics degree. "Whatever economics I learned, I learned by listening and learning," he said, after winning the Nobel prize.
A warm and charming man, he had an impish wit. Once, a seminar speaker wrote an equation on the board, declared that the proof was "obvious" and stared around, daring anyone to challenge him. "Is that proof by intimidation?" Hurwicz quipped.
He joined the faculty of the University of Minnesota in 1951 and stayed there all his working life, even as his reputation outstripped the department's. "Self- promotion was completely alien to him," said John Roberts, a professor at Stanford. "He could have moved and he chose not to."
He travelled widely, spending time as a visiting professor at many universities, including stints in Bangalore, Tokyo and Beijing. A long-time member of the Minnesota Democrats, he supported the anti-Vietnam war candidacy of Eugene McCarthy and sat as a delegate at the party's national convention in 1968. He remained involved in the party up until his death.
Some felt he should have won the Nobel prize sooner. He was not outwardly perturbed. "I never had the impression that the wait bothered him," said Eric Maskin, who shared the prize with Hurwicz and Roger Myerson.
He is survived by his wife, Evelyn Jensen - they married in 1944 - and their two sons and two daughters.
Copyright The Financial Times Limited 2008